Argument: Progressive taxes help increase employment rate

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Knut Røed & Steinar Strøm. "Progressive Taxes and the Labour Market: Is the Trade–off Between Equality and Efficiency Inevitable?" Journal of Economic Surveys. 16 Dec. 2002 - Does an income tax harm economic efficiency more the more progressive it is? Public economics provides a strong case for a definite 'yes'. But at least three forces may pull in the other direction. First, low–wage workers may on average have more elastic labour supply schedules than high–wage workers, in which case progressive taxes contribute to a more efficient allocation of the total tax burden. Second, in non–competitive labour markets, progressive taxes may encourage wage moderation, and hence reduce the equilibrium level of unemployment. And third, if wage setters have egalitarian objectives, progressive taxes may reduce the need for redistribution in pre–tax wages, and hence increase the demand for low–skilled workers. This paper surveys the theoretical, as well as the empirical literature about labour supply, taxes and wage setting. We conclude that in a second best world, the trade–off between equality and efficiency is not always inevitable.

Erkki Koskelaa. "Tax progression is good for employment in popular models of trade union behaviour". Elsevier Science B.V. 1996 - It is a widely-held popular belief that the more progressive the tax system is, the greater is the disincentive to work effort. This belief can be justified within the context of conventional labour supply analysis. Increased progression with unchanged tax revenues decreases work effort and is thus bad for employment. But does it hold in unionized economies, where trade unions play their role in wage and employment determination? Using three popular models of trade union behaviour — the monopoly union, the ‘right-to-manage’ and the efficient bargain model — as the framework for analysis, this paper provides the unambiguously negative answer that under plausible assumptions an increased tax progression lowers wages and is good for employment in all three popular models of trade union behaviour. This means that the effects of taxation appear to be very sensitive to the structure of labour markets.